Building a Startup: Performance Marketing Metrics That Ensure You Acquire Customers With Fat Profit Margins
In any other hands, “an article about marketing metrics” might be as dry as sandpaper in Death Valley.
However, much like an Epcot “ride” circa 1990, I’m going to seamlessly, simultaneously educate and awe you…
(...and who knows? Maybe there’ll be an Eastern Airlines reference in there too!)
So today is no fluff… a few jokes for color… and a whole lotta knowledge about MARKETING METRICS!
Level One: The “Big Ones”
Performance marketing boils down to one thing:
Acquiring customers at a profit for your business.
That’s it.
Now, there are a lot of different ways to interpret even that simple phrase, as you’ll see in just a minute.
Just keep that in the back of your mind as we go through these “baseline metrics.
The first metric you 100% need to know is your customer LTV (lifetime value or “long-term value”).
This is “how much money the average customer spends on your product or service over a set period of time.”
It’s typically figured on a cadre basis: that is to say, “take all customers from January 2023, and measure how much they’ve cumulatively spent monthly.”
Consequently, you’ll see a lot of people talk about “Day 32 LTV,” “Day 64 LTV,” “Day 96 LTV,” all the way up to “Day 352 LTV.”
(The exact numbers might differ a bit–some folks might use Day 90 instead of Day 96, for example).
How you calculate it: Total Revenue Spent By the Cadre Over the Period of Time / Customers in the Cadre
WHY IT’S IMPORTANT:
Your customer LTV allows you to “back in” to how much profit you want to make.
Seriously: once you know your LTV, you can work backwards to determine:
-Your CAC (“Customer Acquisition Cost”)
-Your Overhead (10% of revenue is a pretty good benchmark)
-COGs
-Refunds
-And then work out your profit
What this typically means is you end up knowing all of those metrics above, and then back into your CAC.
Speaking of CAC:
Customer Acquisition Cost (CAC)
This is how much in marketing spend you pay to acquire a new customer.
Sometimes you might see it as “CPA” (Cost Per Acquisition).
This is foundational to your business–a lot of slick marketing types and agencies (ahem…sorry had something in my throat there) will try to maximize this, especially if they get a percentage of ad spend as a commission.
You need to be the “tough parent” that comes in and holds the line on average ad spend.
There are a lot of different philosophies as to how to balance CAC and LTV.
Some companies are willing to “deficit spend” up-front on CACs knowing they’ll “make it up” on the back-end in LTV profit.
For example, let’s say your Day 0 LTV (what the customer spends in their first interaction with you) is $50. But you know for sure after running the numbers that your Day 96 LTV is $100. If you want to bake in a 20% profit margin ($20), and you spend $10 on COGs, and 10% on overhead, you can spend up to $60 to acquire a customer.
So even though you’re losing money on day zero, you’re making a pretty healthy 20% margin after everything is considered.
If you’re willing to go down to 10% margins, you can spend $70 to acquire a customer.
You see this a lot of times with cellphone companies. “We’ll pay off your phone with another carrier!” “$50 per line for the first year!”
They’re willing to eat dirt a little bit on the front end because the lifetime value is so high.
Same with (ahem…ahem…sorry got something REALLY stuck in my throat) gambling apps.
“$1,000 in free bet credits if Jason Tatum goes over 0.5 points” or the like.
Again, dealing with MASSIVE LTVs and MASSIVE amounts of capital in these companies.
So they can afford to “play the game” and go a bit negative to make more money down the road.
NOTE: Day Zero LTV is also sometimes referred to as “Average Order Value,” or “AOV,” especially if you’re upselling more stuff to folks on day zero. I’ve also had ecommerce types call it “the cart,” though again, if you send a follow-up email with a chance to buy something else, that’s not 100% accurate.
I’ve gone through how to figure “the basics,” and they’ll vary greatly depending on your line of business.
Also, when starting out, you may have to make some assumptions about (especially) LTV, and CAC.
CAC is pretty easy to sort out quickly: test! Spin up some Facebook ads, hire an agency, run some podcast ads, use the previous articles to figure out where your starving crowd is, and then run some media there.
Determine how much it costs to acquire a customer on a given channel.
And then look at industry benchmarks for the average cost to acquire customers in your industry.
For example, in mobile gaming, accepted CAC is typically $2 - $5.
We were able to hit the low end of that in our test–good job on me!
I’ve also been in supplements for a long time. If we were able to get $2 - $5 CACs in supplements, we’d literally be popping bottles of Cristal hand-delivered by English butlers in Rolls Royces to everyones’ houses, and we were a fully remote company, so that’s no small feat!
That’s because you’re usually looking at an LTV in the $150 - $200 range for supplements on average. In a mobile game, that would qualify someone as “a whale,” so it’s all relative.
Where you can get a competitive advantage:
Radically DECREASE acquisition costs
Think of things like referral programs, or viral videos on social, or leveraging other peoples’ audiences for a percentage commission…or finding those “shoe stores” that can refer a boatload of customers to you.
Radically INCREASE AOV and LTV
Most businesses prefer to run “Day 0 Positive,” meaning their AOV should be greater than their CPA.
How much greater it should be is measured by something called:
ROAS (Return on Ad Spend)
How this is figured:
Revenue generated on Day Zero / Total Ad Spend on that day.
Typically businesses like to be at a 1.5 ROAS. That means if you spend a dollar on ads, you get back $1.50 on day zero.
If your ROAS is less than one, that means you’re “deficit spending” on ads for the time being–you’re hoping to make it back on the back end / LTV.
Businesses can be perfectly happy / survive / thrive on ROASes anywhere along the spectrum–I imagine those online betting apps are on one extreme, probably at like a 0.05 ROAS on day zero.
On the other end, you probably have HVAC contractors that are many multiples of ROAS because they rely mostly on word-of-mouth and don’t spend much at all. It’s possible to have “infinite ROAS” if you don’t spend a dime on advertising.
More Advanced Metrics (Facebook)
If you get into actually running ads for your business, here are some things to keep an eye on (we’ll focus on Facebook Ads for now, but know that these can be adapted to a bunch of other platforms with their own wrinkles and metrics).
So you already know CAC, AOV, and LTV.
As I’ve mentioned earlier, CPM is the cost of buying traffic on the platform per one thousand people who see your ad.
CPMs vary wildly–I’ve had them as low as $10 in campaigns I run, and I’ve seen them as high as $250 (!!!).
Again, these will vary wildly depending on your target market, LTV, AOV, etc.
Related to CPM is Cost Per Click (CPC).
This is how much you end up paying for a single click on a platform.
This can be as low as $0.02, or like $4 (or higher). Again, it depends on your niche, your spend, your ideal customers, etc.
Click Through Rate (CTR) is how many people are clicking through your ad to your lander page, or if it’s a lead ad, how many people click the Call-to-Action button. Again, these can vary wildly–6% is “good” for supplements. It can be higher or lower depending on the market.
Conversion Rate (CVR) the way I calculate it is (on Facebook at least) Total Sales (or Conversions) From Clicks / Total Clicks.
Again, this can vary wildly. And it REALLY depends on “Your Offer.”
That was originally supposed to be the focus of this week’s piece…but then I realized it doesn’t make too much sense to dive into those waters until you have one of those little…duck…inflatable…belt…thingys…around your waist.
Pulling it All Together:
Here’s a helpful primer on all of the wonderful basic marketing metrics we’ve covered:
LTV: Lifetime Value. Total Cadre Revenue / Total Number of Members of the Cadre over a Set Period of Time
CAC: Customer Acquisition Cost (CAC) = Ad spend / customers brought in by that ad spend
AOV: Day Zero LTV
ROAS: Return on Ad Spend. Revenue generated by ad spend / ad spend
CPM: Cost per thousand views
CPC: Cost Per Click. Ad spend / clicks generated by that ad spend.
CTR: Click Through Rate. Clicks / Ad Impressions
Conversion Rate: Total Conversions / Total Clicks
And that’s really it!
There are some more advanced metrics like “hook rate” and “hold rate” (no, these aren’t NHL stats, they’re Facebook video stats), and some other really advanced metrics you could dive into…
But the above is “enough” for any business owner to get started, and dig into how their marketing spend is going.
I wish you the best of luck in using them… now for a lighter diversion:
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And he talks a BUNCH of $#!^ on X!
Not only that… but I’m trying out some cool new angles there… and introducing new characters from the game weekly.
For now though, TD Terry is my GLORIOUS PLAYGROUND… so if you:
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You should follow TDTerryBaggedUp on X and drop him an insult / line.
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And I’ll be back next week with Making an Irresistible Offer Your Prospects Are Powerless to Refuse.
In other words…RESISTANCE IS FUTILE!
Until next time…
DJ